REAL ESTATE BLOG -- PAUL ETZLER

As tax policy tightens, energy strategies reap added tax benefits

Despite some unfavorable tax legislation recently, property owners still have some ability to manage federal income taxes.

Last month we discussed depreciation expense strategies to maximize savings. This month we will continue down the depreciation path by addressing cost segregation studies and the tax code for Energy Efficient Buildings (EPAct Section 179D). In addition, we'll touch on the Energy Efficient Home Tax Credit (IRC Section 45L).

Although used since the 1960's, it wasn't until commercial building depreciable lives jumped from 19 years (and less in some cases) to 31.5 years and to 39 years that engineering shorter-lived assets out of a building's cost had a real impact to tax-reduction methods.

For buildings that have been in service, a cumulative catch-up depreciation deduction can be taken in the year the study is performed. Hence, a building placed in service, or purchased, five years ago can take five years of accelerated depreciation, all in 2013. The study is applicable to all types of business property, and should be coordinated by a tax professional and an engineer.

EPAct Section 179D allows for an immediate depreciation tax deduction for the installation of energy efficient retrofits. The actual energy savings requirements depend on the type of retrograde retrofit. If the improvement qualifies, the building owner can claim up to 60 cents per square foot for interior lighting upgrades; 60 cents per square foot for HVAC upgrades; and 60 cents per square foot for building envelope upgrades.

These can be combined so it is possible to gain a tax deduction of as much as $1.80 per square foot. Like cost segregation studies, a professional qualified to conduct detailed studies and certify the property is essential.

Don't overlook energy credits for residential uses

IRC Section 45L offers a tax credit of $2,000 per residential unit when constructing or substantially renovating an apartment complex or other dwelling unit, as defined. As with the Section 179D deduction, certain energy savings requirements must be met, documented, and maintained. Furthermore a tax professional should be consulted to ensure compliance with the tax credit requirements.

These are just three opportunities for building owners to reduce current federal income tax burdens. All three strategies have been available to the taxpayer for several years. However, with a substantial increase in tax rates, now is the time to reevaluate the impact these IRS opportunities can have on your bottom line.

Paul Etzler is a principal in Skoda Minotti's Real Estate and Construction Group. He is located at the firm's Mayfield Village office

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